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Recession takes toll on US gas markets


By Mark Davidson, Jim Magill


February 24, 2009 - In February 2008, as frigid weather gripped most of North America, demand for natural gas soared and prices bounced between $8 and $9/MMBtu -- by no means a record, but historically high nonetheless.


This winter has been even colder in most regions, but you wouldn't know it from the natural gas market. NYMEX gas futures prices are near six-year lows, while spot prices are hovering around the $4/MMBtu mark -- a level that was unthinkable just six months ago.


Why the dramatic shift? Two words: The economy.


Over the past year, as a global recession has taken hold, demand for natural gas has begun to plummet in North America and worldwide.


Fertilizer, steel and chemical plants, which use substantial amounts of gas in their production processes, are laying off workers by the thousands and shutting in facilities.


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Residential and commercial customers, forced to cut costs to make ends meet, are reducing their gas usage as well.


Couple that with a surge in gas supplies hitting the market from prolific new shale formations in the US and Canada, and you have one of the most bearish gas markets in years.


"Natural gas prices in 2009 are expected to be largely driven by the extent of the supply response to the persistence of sluggish consumption in light of the current economic downturn," the Energy Information said in its February outlook.


As a result, the agency expects the Henry Hub gas price to plunge from an average of $9.13/MMBtuin 2008 to about $5/MMBtu in 2009. (See Henry Hub Daily Pricing Points chart.)


Frustrated gas producers are already responding to the price drop -- and to the worsening credit crunch -- by cutting back on their drilling activity this year.


While that should reduce the amount of gas on the market and help balance out supply and demand over time, the industry can expect a prolonged period of price weakness until the economy rebounds and demand returns in earnest.


Analyst: Drilling could slow up to 40% this year


Gas drilling activity in the Lower-48 states could drop as much as 40% this year, causing the first annual production decline in seven years, an industry analyst said on February 12 in Houston.


George Lippman, president of Lippman Consulting, told the local chapter of the International Association for Energy Economics that after a series of boom-and-bust cycles, Lower-48 gas supply began to increase gradually in the early part of this decade.


"From 2002 until now we've had a steady run-up of almost seven years of steady growth in rig activity, development and everything -- until the last four months. We've seen the drop-off that's occurred," he said.


In December, when Lippman produced the initial version of a gas production outlook for the Lower-48, gas supplies available for sale stood at about 60.4 Bcf/d. At the time, he forecast that new gas drilling activity would decline about 10% this year compared with 2008.


At the time the survey was being produced, however, he started to see a much sharper downturn taking place in drilling activity as producers started to react to low commodity prices and the global credit crunch. "We still don't know how deep and where this is going," he said.


The total number of wells drilling for gas increased from 25,000 wells in 2003 to almost 35,000 in the 2006-07 timeframe before declining slightly in 2008, Lippman said. Currently "we're a little under 34,000 wells. From that our forecast for 2009 called for a decline to about 32,000, or about a 10% decline."


But that projection is likely to prove very conservative given the dramatic slowdown in recent months, he said, laying out various scenarios for 2009.


For example, if activity in the Lower-48 drops 20%, total gas supply still would continue to rise this year to a little over 60 Bcf/d, Lippman said. If that rises to 30%, "then 2009 volumes do not increase; they stay flat to 2008. Then we see this decline and by 2013 we're back to about 56 Bcf/d."


With an overall 40% drop in activity, "instead of the 60 Bcf/d it gets closer to 59 [Bcf/d]," Lippman said. "Then we see a huge drop in 2010, all the way down to 56 Bcf/d, and by 2013 we're down to 53 Bcf/d."


The market is "at the edge of that cliff, trying to figure out where the bottom is," he said.


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